Japan’s new central bank governor has promised to fulfill the government’s plan of achieving a 2% inflation rate to raise Japan out of the economic doldrums within two years. His words are not convincing to many, including the outgoing governor, and the Deputy Prime Minister. However, if these goals are met, it may mean the end of a two-decade long period of economic stagnation for Japan.
The new Governor of the Bank of Japan, Haruhiko Kuroda took up his post this week, and gave his first press conference in Tokyo. He promised to make all-out efforts to fight deflation with aggressive measures and to achieve results soon.
“I’m ready to take all means available in easing monetary policy,” said Kuroda. “It’s the mission of the BOJ to do its utmost to achieve the 2 percent price stability target as soon as possible. Looking at other countries, many central banks see the time span for meeting their price stability target as two years, so it would be desirable to meet the price target within two years.”
Prime Minister Shinzo Abe has raised public expectations about the economy by promoting inflation through easing measures – in other words, increasing the amount of money in circulation – as a desirable objective. These expectations have been mirrored in higher stock prices, and an approval rating of over 70% for Abe.
“Without adopting further bold easing, the 2 percent inflation target cannot be met,” Kuroda said. “I’m ready to use all possible means in order to achieve the 2 percent price stability target as soon as possible, including open-ended asset purchases. We’ll discuss with the policy board on what specific steps should be taken.”
However, the previous Bank of Japan Governor, Masaaki Shirakawa, disagreed with Prime Minister Abe over ways to kick-start the world’s third-largest economy back into life, and resigned.
Shirakawa said, “It is not a lack of cash that has kept companies from increasing capital expenditure If there was a single thing that would have cleared the fog and solved all problems, Japan wouldn’t have been in this situation for 15 years.”
Some are worried that prices will outstrip wages, and reduce the purchasing power of ordinary people, which will keep the economy stagnant. In addition, aggressive easing measures may lead to charges of currency manipulation, which will help Japan’s exports, but will hit the average consumer hard in the wallet, given that fuel to generate electricity must be imported and paid for with expensive dollars.
There are those who criticize Abe’s massive stimulus spending, pointing to years of such spending by the LDP in the past which proved to be wasteful and unproductive. In addition, even the Deputy Prime Minister, Taro Aso, has criticized the 2-year target to achieve a 2% inflation rate as “academic” and “unrealistic”.
A gung-ho central bank governor may be good for the Prime Minister’s ego, but brave words in a press conference will have to be backed by results before the rest of the world can be convinced that Japan is on the path to recovery. Such results will not be immediately forthcoming, and almost certainly there will be no visible signs of improvement before the summer’s Upper House election, which Abe hopes will put him more firmly in the driving seat.